Accounting is the process of keeping a record of transactions which can be used for future reference. The main purpose of accounting is to ensure that businesses have a detailed history of all their transactions so they can be able to make more informed decisions in the future. There are many different types of documents that allow businesses to keep track of their financial information, but one type that is particularly important is source documents.
What are source documents?
Source documents are the original documents that provide evidence of a transaction.
A source document contains information about a transaction, such as the names of the parties involved, amounts including Sales Tax (VAT/GST), date, transaction number, description and any relevant legal terms. See the South African requirements for valid tax invoices here.
What are Source Documents used for?
Source documents are a critical part of accounting because they provide evidence for Annual Financial Statement Audits or Tax Audits.
They are also used to analyse costs by for example reviewing what expenses related to a particular cost the company, or what the tax treatment of an expense was.
Examples of Source Documents
Source documents can be in a variety of forms, including:
Sales invoices.
Supplier invoices or receipts for expenses or assets purchased.
Purchase invoices.
Purchase orders.
Payslips for employees.
Employment contracts.
Bank statements.
Credit card statements.
Loan agreements and statements.
Rental agreements for business property or equipment.
Storage of Source Documents
You are required to keep the original Source Documents, whether that be digital or hard copy. However, generally, when needing to provide evidence, digital copies should be sufficient.
We recommend keeping the original hard copies of source documents and storing them in a secure location as well as storing digital versions thereof in either cloud file storage or your online accounting software. If a document was received in digital format, we don't see a need to store a hard copy.
Using software like Dext, ApprovalMax or HubDoc can assist with automating and streamlining this process, ensuring many of your Source Documents are processed to Xero or QuickBooks Online in an efficient manner. An electronic copy of the Source Document will then be attached to the relevant transaction in your accounting software. This makes it easy for auditors to review your reviews or to download documents for a tax audit.
How long do I need to keep Source Documents?
Source Document retention period depends on the requirements of your tax authority:
SARS - you are required to keep all supporting documents for a period of 5 years from the date of submission of the return to SARS.
IRS - This ranges from 3 to 7 years.
HMRC - The default standard retention period for HMRC records is 6 years plus current, otherwise known as 6 years + 1. This is defined as 6 years after the last entry in a record followed by first review or destruction to be carried out in the additional current (+ 1) accounting year.
You will need to consider any other legislation applicable to your industry that may impact the document retention period.
Conclusion
Source documents can be used for multiple purposes, including accounting, financial reporting and tax. They are an important part of your business's financial system and should be easily accessible when required.